BEAD Matching Funds

Most of the published summaries of the BEAD grant rules state that the BEAD program will provide 75% funding, meaning a grant applicant must contribute 25% of the cost of the grant project. The reality is that the matching rules are more complicated than that simple rule. Following is a more detailed dive into the issue of BEAD matching.

Matching funds can come directly from the grant applicant or can be provided by local and state governments using funding from the CARES or the ARPA programs. The BEAD rules don’t allow matching contributions from other federal sources such as the FCC Universal Service Fund, ReConnect grants, or the RDOF subsidy awards. The BEAD rules allow federal broadband loans to be used to supply the matching funds.

While the grant rules allow matching to come from the CARES or ARPA money, there is a big catch. States are required to incentivize matching funds to be directly funded by entities with the financial wherewithal to make such contributions. This means a State might penalize an applicant with a good balance sheet from using state and local matching funds in an application. This is an interesting feature that means that big corporate applicants or other entities with a strong balance sheet probably should be prepared to directly fund all matching and not use other grants as matching. One way to think about this rule is that the NTIA wants to reward applicants that put skin in the game. They don’t want to see entities that come with 75% BEAD grants and 25% local grants. I know that the big ISPs and other strong entities like larger electric cooperatives are seeking to make partnerships to get access to local grant funds – but this rule might mean that is a bad idea.

There is another provision that I think a lot of grant applicants are going to find disturbing. States are required to incentivize matches of more than 25%. This brings an aspect of what feels like the reverse auction into the process, meaning entities willing to contribute higher matching will gain a preference over applicants bringing 25% matching. I label this as disturbing because this could be a way for the well-heeled giant ISPs to snag a lot of grant awards – they can outbid other applicants by bringing more than 25% matching funds. However, unlike a reverse auction, an outbid applicant gets no opportunity to amend their first proposal and make a counter-off. This makes the BEAD application feel like a blind, one-round reverse auction.

At the other extreme, a State has the ability to waive any matching requirements, particularly for small applicants or for areas with extremely high costs. If not done well, this could really gum up getting funding to high-cost areas. Would somebody offering a 5% match automatically beat somebody that is asking for the match waiver?

The BEAD grants also allow for in-kind matches. These are non-cash donations of property, goods, or services that meet federal audit standards. In-kind matches can be complicated and might include things like employee time or volunteer services; equipment; supplies; indirect costs; computer hardware and software; use of facilities; or waiver of fees associated with access to rights of way, pole attachments, conduits, easements, or access to other types of infrastructure. These are worth considering. For example, it would count as a non-cash in-kind match if a local government provided free permitting for a grant project.

These various matching rules add another layer of complication to the grant process. Applicants now have to worry if pursuing local matching funds from ARPA will hurt their chances of winning. Applicants must worry if some big ISP offers more than a 25% match to outbid them to grab a market. A lot of the answers to these questions will depend upon how a given state interprets the NTIA rules – it won’t be surprising to see these requirements handled differently by state. This means that it’s going to be vital to understand the nuances of what your state is proposing because the grant rules are not going to be the same everywhere.

The NTIA Preference for Fiber

As might be expected when there is $42.5 billion in grant funds available, we are probably not done with the rules for the BEAD grants. There are several areas where heavy lobbying is occurring to change some of the rules established by the NTIA in the NOFO for the grants.

One of the areas with the most lobbying is coming from WISPs that are complaining that the NTIA has exceeded its statutory authority by declaring a strong preference for fiber. The NTIA went so far as to declare that fixed wireless technology that doesn’t use licensed spectrum is not a reliable source of broadband and isn’t eligible for BEAD grants. The wireless industry says that the NTIA is out of bounds and not sticking to a mandate to be technology neutral.

I decided to go back to the Infrastructure Investment and Jobs legislation and compare it with the NOFO to see if that is true. Let’s start with the enabling language in the legislation. The IIJA legislation makes it clear that the NTIA must determine the technologies that are eligible for the BEAD grants. One of the criteria the NTIA is instructed to use is that grant-funded technologies must be deemed to be reliable. Reliable is defined in the Act using factors other than speed and specifically says that the term “reliable broadband service’ means broadband service that meets performance criteria for service availability, adaptability to changing end-user requirements, length of serviceable life, or other criteria, other than upload and download speeds.

I interpret ‘adaptability to end-user requirements’ to mean that a grant-eligible technology must have some degree of what the industry has been calling being future-proofed. A grant-funded technology must be able to meet future broadband needs and not just the needs of today.

‘Length of serviceable life’ refers to how long a grant investment might be expected to last. Historically, broadband electronics of all types typically don’t have a useful life of much more than a decade. Electronics that sit outside in the elements have an even shorter expected life, with components like outdoor receivers for wireless not usually lasting more than seven years. The broadband assets with the longest useful lives are fiber, huts, and new wireless towers. If you weigh together the average life of all of the components in a broadband network, the average useful life of a fiber network will be several times higher than the useful life of a wireless network.

NTIA then used the reliable service criteria to classify only four technologies as delivering a reliable signal – fiber, cable modem hybrid fiber-coaxial technology, DSL over copper, and terrestrial fixed wireless using licensed spectrum. Since DSL cannot deliver the speeds required by the grants, that leaves only three technologies eligible for BEAD grants.

The legislation allows the NTIA to consider other factors. It appears that one of the other factors the NTIA chose is the likelihood that a strong broadband signal will reach a customer. I speculate that fixed wireless using only unlicensed spectrum was eliminated because interference of unlicensed spectrum can degrade the signal to customers. It’s a little harder to understand which factors were used to eliminate satellite broadband. The high-orbit satellites are eliminated by not being able to meet the 100-millisecond requirement for latency established by the legislation. I would speculate that low-orbit satellites are not eligible for grants because the average life of a given satellite is being touted as being about seven years – but I’m sure there are other reasons, such as not yet having any proof of the speeds that can be delivered when a satellite network fills with customers.

From the short list of technologies deemed to be reliable, the NTIA has gone on to say several times in the NOFO that there is a preference for fiber. When looking at the factors defined by the legislation, fiber is the most future-proofed because speeds can be increased drastically by upgrading electronics. Fiber also has a much longer expected useful life than wireless technology.

The accusations against the NTIA seem to be implying that the NTIA had a preference for fiber even before being handed the BEAD grants. But in the end, the NTIA’s preference for fiber comes from ranking the eligible technologies in terms of how the technologies meet the criteria of the legislation. It’s worth noting that there are other parts of the NOFO that do not promote fiber. For example, state broadband offices are encouraged to consider other alternatives when the cost of construction is too high. I think it’s important to note that any NTIA preference for fiber does not restrict a state from awarding substantial awards to fixed wireless technology using licensed spectrum – that’s going to be a call to make by each state.

There is a lot of lobbying going on the expand the NTIA’s list to include fixed wireless using unlicensed spectrum and satellite broadband. I’ve even heard of rumors of lawsuits to force the expansion of the available technologies. That’s the primary reason I wrote this blog – as a warning that lobbying and/or lawsuits might delay the BEAD grants. I think the NTIA has done what the legislation required, but obviously, anybody who is being excluded from the grants has nothing to lose by trying to get reinstated in the grants. When there is this much money at stake, I don’t expect those who don’t like the NTIA rules to go away quietly.

Private Equity and Rural Fiber

I’ve been asked three or four times in the last few weeks why anybody would invest in building rural broadband networks with the goal of getting rich. I’ve been hearing the same rumors as everybody else that there are private equity investors ready to jump into the rural grant arena. I have no specific knowledge that this is going to occur, but I’ve run across several ISPs recently who claim to have access to nearly unlimited equity funding.

It’s easy to understand why somebody who doesn’t understand the rural industry might think this is a great time to invest. Just having a $42.5 billion BEAD grant program on the horizon is bound to attract investors who think that free money ought to mean big returns.

But I’m afraid that private equity investors are going to find a different business environment in rural broadband markets than what they are expecting. Consider the following:

  • Even with a 75% grant, it’s often hard to pencil in a rural grant project. I’ve always used the metric that the total cost per passing (home or business that could buy broadband) needs to be no higher than $3,000 to break even or $2,000 to earn a decent return. That means that even with a 75% grant, an ISP needs to be cautious if the cost per passing approaches $12,000 – many of the rural communities that will qualify for the BEAD grants will cost even more than that.
  • The $2,000-$3,000 metric is only a rough rule of thumb because success also depends on the customer penetration rate. Any broadband business plan can go south in a hurry if it doesn’t attract enough broadband customers. I’ve worked in enough rural markets to know that the interest in buying broadband varies widely. I know of farm communities that have 90% broadband penetration – but I’ve seen others where the public interest in broadband is only half of that number.
  • A rural broadband business is also extremely sensitive to operating costs. It takes more technicians to cover a spread-out rural market than in denser towns. Having to add just a few extra technicians in a market can be a huge drag on profitability.
  • I’ve written several blogs where I note that the complex grant rules are going to layer on extra costs for grant projects. Having to pay prevailing wages, getting irrevocable letters of credit, and paying for environmental studies are going to drive up the cost of BEAD and similar grants. The fact that the grant money is considered as taxable income can create a huge early cost.
  • It’s hard for even the most experienced ISP to currently estimate the impact of supply chain issues and inflation on a large construction project. If an ISP wins a grant but underestimates costs, the extra expenditures are all out-of-pocket for the grant winner.

That list makes it sound like I don’t think anybody should be going after the BEAD grants, but it doesn’t. There are ISPs in the industry with the right mentality for pursuing the slow returns of rural broadband. I’ve talked to electric cooperatives that would be satisfied if a new broadband business breaks even in a decade. They know they are building a hundred-year business, and they know that the broadband business will be solid once the initial debt is retired in twenty years. They understand that a rural broadband business might eventually become a cash cow if they are patient enough – but even then, the returns are modest in terms of what investors are seeking. These coops are more interested in taking care of their existing customers and communities than in somehow getting rich from broadband.

I suspect that part of the lure for new investors to the industry is the high multiples being paid recently for broadband networks. Some of the multiples I’ve seen in the last few years are the highest in my memory. Even the prices being paid for copper networks, like Apollo’s purchase of CenturyLink properties, are astronomical when considering the underlying business. But there is no reason to think that today’s high multiples will somehow accrue to rural fiber networks, especially if those networks aren’t generating much return.

To answer the original question that I’ve been asked – why would private equity want to invest in rural broadband? The more I think about it, the more I come up with the same answer – I have no idea.

Politics and the FCC Maps

Harold Feld of Public Knowledge wrote an interesting personal blog looking at the possibility that the FCC won’t be able to get the needed votes to approve the new broadband maps this fall, which would then put the $42.5 billion BEAD grants on hold. It’s an interesting speculation that, unfortunately, sounds completely plausible.

The blog dives deeply into the administrative rules at the FCC, and Feld explains in detail why the FCC must vote to approve the new broadband maps. There are no administrative alternatives to an FCC vote for approving the maps to use in the BEAD grant process.

That vote is where it gets interesting because that’s where politics and lobbying by the big ISPs come into play. Feld speculates that the FCC might not approve the broadband maps because all votes on similar matters over the last decade have gone entirely along party lines. If partisan voting sticks true for this issue, then a 2-2 tie would mean that the new maps would not be authorized – and without the approval of the new maps, the $42.5 billion of BEAD grants would be on hold.

I’m sure that most people don’t realize how partisan the FCC has become. The FCC routinely approves a lot of administrative issues, often by unanimous votes. The agency has also been approving more complex issues like issuing spectrum – which is not politically controversial.

But the 800-pound gorilla in the room is the question of whether ISPs should be regulated. The big carriers expended huge lobbying efforts and contributions to politicians to get the Ajit Pai FCC to kill Title II regulation. The big ISPs are like the largest companies in every industry in hating to be regulated. But big ISPs are somewhat unusual in that they have effectively been able to largely neuter the FCC, meaning that ISPs are no longer regulated for issues that matter.

The biggest fear the big ISPs have is the idea of price regulation. As the prices for broadband have climbed out of the reach of affordability for many families, the ISPs have to know that a strong FCC would be calling them to task for their rates. The big ISPs must have collectively cringed recently when the NTIA’s NOFO for the BEAD grants talked about requiring a ‘middle-class rate plan’, whatever that is.

The big ISPs know that allowing a fifth Commissioner selected by a Democratic administration will mean a renewal of something like Title II regulation. Staving off regulation is priority one, two, and three on the big ISP wish list. It probably seems unbelievable to the average person that we’re a year and a half into a new administration and we haven’t replaced the outgoing Ajit Pai. But it seems like donations from the big carriers have been effective in squelching a vote to nominate Gigi Sohn.

The billion-dollar question that Feld asks is if Congress will care more about continuing to kill chance of being regulated versus awarding grants to bring broadband to rural America. As Feld points out, the big telcos aren’t enthusiastic about grants that will finally overbuild their historic service territories and kill the remaining revenues, so it’s possible that they are fine with delaying the BEAD grants.

The most important question nobody will be able to answer until this fall is if it will really require five FCC Commissioners to approve the new maps. It’s certainly possible that one or both of the Republican Commissioners could vote to approve the maps, making Feld’s speculation moot. There will certainly be gigantic political pressure to approve the maps – there is a huge groundswell of enthusiasm from communities that believe this is their chance to get broadband. But to a large degree, sitting FCC Commissioners are shielded from direct political pressure.

I know that in most of rural America that broadband is not a partisan issue. I’ve talked to countless county officials who tell me that broadband is the most talked-about local issue. Unfortunately, local sentiments often don’t carry up to DC. If the existing Commissioners continue to vote along partisan lines, as has happened regularly for the last decade, then the only way to break that tie will be the approval of the fifth Commissioner. I don’t have any better crystal ball than anybody else, but the scenario painted by Feld seems far too plausible.

The Extra Costs of BEAD Funding

A few weeks ago, when I did my first summary of the $42.5 billion BEAD grant program, one of my observations was that there are a lot of extra costs for an ISP to accept BEAD funding. This is something that anybody taking the funding must understand. Some of those extra costs include:

Environmental and Historic Preservation Reviews. I’ve occasionally worked on a non-grant network project that required these reviews. For example, these are normal requirements for building networks through state and federal parks. Indian tribes require these if there is any chance of construction through historically sensitive areas. I would expect to take extra precautions if I was building fiber close to the Liberty Bell or some other historical place. But other than those examples, no commercial project I’ve ever worked with has voluntarily done these reviews. Most networks are built using existing rights-of-way along roads where the soil was excavated in the past. I can’t imagine the slightest reason why these reviews would be required for placing fiber on existing utility poles.

Letters of Credit. I’ve written a separate blog on this issue. The grants require an irrevocable letter of credit just to apply, and a second letter of credit from grant winners. I think the NTIA saw the criticism leveled at the FCC in the RDOF process and wants to exclude bad actors, but this jacks up the cost of applying for a grant and could add a few percent to the overall cost of a grant project. This will also likely deter small ISPs who want to fill in some of the neediest pockets but can’t get a bank to provide the line of credit.

Prevailing Wages. Projects over $5 million must use prevailing wages. The majority of the projects will be rural, and the folks who made this requirement don’t understand the rural contractor environment. Rural contractors already pay wages that are some of the best paying jobs in a rural economy. They must do so, or in this time of technician shortage, they wouldn’t have any workforce. But they don‘t pay the extra-high prevailing wage rates that are charged in urban areas. Those rates are higher because of the higher cost of living in urban areas. If prevailing wage studies were done correctly, they’d find a separate prevailing wage for urban and rural communities. To make things worse, rural contractors don’t want to be required to pay prevailing wages if they also have non-prevailing wage workers because it causes dissension between crews who want to all work on the higher-paying project. This is a case of a solution seeking a problem because the existing wages in rural areas are balanced by the lower cost of workers not having to live in cities.

Requirements on Contractors. The BEAD NOFO layers a few new requirements on contractors. As an example, a construction contractor working on a BEAD project must certify that it has a workforce development program that includes participation in an apprenticeship program. This requirement ignores an important characteristic of most fiber and tower contractors – many of these contractors have few direct employees. They instead hire small crews of specialty subcontractors – and these small subcontractors will walk away if asked to meet this requirement or do extra paperwork. My fear is the contractors who have historically worked in rural markets won’t take BEAD work if it puts extra burdens on them – there is plenty of non-BEAD work.

Heavy Reporting Requirements. I don’t have a problem with requiring follow-up reporting on the effectiveness of grants, and in the past, some programs like CAF II had almost no follow-up. But the reporting requirements for BEAD are more detailed than anything I’ve seen, so it’s going to cost more to comply.

Grants are Taxable. We can’t forget that grants are taxable income to any taxable entity that accepts the funding. I’m hearing rumors of a D.C. workaround on this issue, but without a solution, it’s going to be hard for a small commercial ISP to justify taking millions in grant money if that means having to somehow fund paying 21% of that back to the federal government plus whatever will be due to the state. It’s not comforting to know that the tax savings will roll back over the next twenty or thirty years as grant-funded assets are depreciated. This is not specifically a BEAD issue and applies to all grants from local, state, or federal sources.

Summary. One of the sentiments I loved in the grant NOFO is that the NTIA wants to get broadband to even the most remote places, and they used the example that funding should be available to reach even a single location. But I have to laugh when I look at these requirements and see that reaching that single remote location might get layered with hundreds of thousands of dollars of extra costs.

The biggest drawback of expensive grant compliance is that it drives up the cost of every grant project. And that means that the BEAD money won’t stretch as far to bring broadband to as many homes. For an individual grant applicant, the extra cost translates into the need for more out-of-pocket matching funds – which in some cases will be enough to make a project infeasible.

I fully understand the desire at the NTIA to not fund bad projects. I imagine there are folks there that still remember the agency being accused in 2009 of funding projects that were “fiber to nowhere”. But the many extra grant requirements feel like we’re applying a pound of prevention to solve an ounce of risk. Any one of the various grant requirements can probably be justified, but when taken as a whole, the grant requirements are adding extra cost and hassle that will make many ISPs pass on the opportunity.

Get Ready for the Challenge Process

There is one interesting aspect of the BEAD grants that could impact any rural community that is hoping to find a broadband solution from the $42.5 billion BEAD grant process. The NTIA is allowing local governments to challenge the broadband maps that will be used to determine the areas that are eligible for the grants. This is something that communities should be getting ready for today.

Let me first explain the background to this challenge process. It’s a confusing and messy story. When Congress funded the new BEAD grants, one of the provisions was that States have to use the FCC maps as the basis for the broadband grants. This is a dreadful provision since the FCC maps have been so inaccurate in the past. Several states have done enough analysis to show that the current FCC maps mischaracterize millions of homes as having adequate broadband that doesn’t exist. This is almost entirely due to the fact that ISPs feed the data into the FCC maps with no review or challenge by the FCC. The FCC mapping rules say that an ISP can report ‘marketing speeds’, and many ISPs have used that ability to overstate the speeds of broadband. For example, there are millions of homes in the current FCC maps using DSL where the telcos claim speeds of 25 Mbps, but where actual speeds are almost always far slower than this. This overstatement of the existing capability means that customers would be categorized as underserved in the BEAD grants instead of unserved.

The FCC is scrambling to create a new set of broadband maps to be used for the BEAD grants. The latest I’ve heard is that the new maps might be ready by November. The new maps completely change the way that ISPs report the data – they now must draw polygons around customers rather than using Census blocks. But the new mapping rules didn’t make the change that matters the most – ISPs are still allowed to list marketing speeds instead of actual speeds.

I’m certain that the new maps are going to be a disaster, at least this first version that comes out this fall. First, many ISPs are going to stumble making the conversion to the new mapping system – it’s complicated and is not going to be easy to get right. But my real concern is that ISPs that want to gum up the grants can do so by overstating broadband speed capabilities, as they have done in the past.

We don’t have to look back very far into the past to see the big telcos try this. On the eve of the RDOF auction, CenturyLink and Frontier tried to increase the reported speeds for tens of thousands of Census blocks to above 25/3 Mbps – a change that would have kept those locations out of the RDOF auction. The FCC blocked these mass changes before the auction, but there is nothing to stop the ISPs from doing this again.

And now, there is a new group of ISPs with this same motivation. In the recent NOFO for the BEAD rants, the NTIA says that grants can’t be used to overbuild a fixed wireless ISP that uses licensed spectrum and provides broadband speeds of at least 100/20 Mbps. That ruling means that these ISPs are going to be highly motivated to declare that they are delivering 100/20 Mbps speeds even if they don’t in order to protect their service areas from BEAD grant eligibility. Many wireless ISPs have overstated broadband speeds in the past even more than big telcos, so it’s not hard to imagine some of them doing this.

The challenge process gives a community the chance to fight back if the new FCC maps show that their community is not eligible for the BEAD grants. Each state must allow for a challenge process where a unit of local government, a nonprofit organization, or an ISP can challenge the broadband maps. These challenges are made to the State, and not to the FCC. I’m hopeful that most states will be sympathetic to challenges that will bring faster broadband to places that need it. A State much submit every successful challenge to the NTIA for review – but I believe that the NTIA will want to get these grants done right.

How could a community mount a challenge? The best way to do this is with a mountain of speed test data that has been collected by address. We know that any individual speed test reading is not reliable proof of broadband speeds – there can be factors at a home, such as a poor WiFi router than can lower the measured speed. But speed tests taken in bulk are good proof. For example, if no speed test in a rural area hits the speeds claimed on the FCC maps, it’s fairly certain that the claimed speed is not being delivered.

I also think that gathering anecdotes and stories of the results of the poor broadband in the affected areas can be effective. If an ISP overstates broadband speeds in an area, stories from folks who tell how they can’t work from home or how their kids can’t do homework over the broadband connections can help to bolster the fact that the broadband speeds are being exaggerated.

States will not be asking for these challenges until sometime after the new year, so there is plenty of time this year to start gathering the evidence. It may turn out you won’t need a challenge if the ISPs in your area report existing speeds honestly. But you need to be prepared for the situation where the FCC maps will deny broadband funding for your area. It will be a disaster for a community if they are unfairly denied grant funding because of a dispute about the FCC maps. It’s happened many times before – but communities need to make sure they don’t miss out on this giant round of funding.

Future-proofing Grants

There has been a lot of discussion in the last few months about how wonderful it was for Congress to have increased the speed requirements for broadband grant eligibility to 100/20 Mbps in the $42.5 billion BEAD grants. But is it really all that wonderful?

It’s obvious that the FCC’s definition of broadband of 25/3 Mbps is badly out of date. That definition was set in 2015, and it seemed like an adequate definition at the time. If we accept that 25 Mbps was a good definition for download speed in 2015 and that 100 Mbps is a good definition in 2022, then that is an acknowledgment that the demand for download broadband speed has grown at about 21% per year, which is shown in the table below.

Historic Download Speed Demand in Megabits / Second

2015 2016 2017 2018 2019 2020 2021 2022
25 30 37 44 54 65 79 95

We have outside evidence that the 21% growth rate makes sense. Several times over the last decade, both Cisco and Opensignal opined that the residential demand for download speed has been growing at that same 21% rate. Cisco said that it thought business demand was growing at about a 23% clip.

This raises an interesting question of how good it is for a grant program today to use a 100 Mbps definition for broadband? The main reason that this is a relevant question is that the BEAD grants aren’t going to be constructed for many years. My best guess is that the majority of BEAD grants will be awarded in 2024, and ISPs will have four more years to finish network construction – until 2028. The above table shows how much broadband demand for download speed grew from 2015 until 2022. What might this look like by the time the BEAD networks are fully implemented?

Future Projected Download Speed Demand in Megabits / Second

2022 2023 2024 2025 2026 2027 2028
100 121 146 177 214 259 314

If we accept that 100 Mbps download is adequate today as a definition of download broadband speed, then if broadband demand continues to grow at 21% annually, the definition of download broadband ought to be over 300 Mbps in 2028. I know many cynics will say that broadband demand cannot continue to grow at the historic rate, but those same people would have said the same thing in 2015 – and been proven wrong. In fact, there has been a steady growth curve for broadband speed demand back into the 1980s. There is no evidence I’ve heard that would indicate that the demand growth has slowed down.

We don’t really need to have this theoretical discussion of adequate broadband speeds because the market is ahead of the above speed growth curves. Since the early 2000s, cable companies have unilaterally raised the speed of basic broadband to keep ahead of the demand curve. The cable companies have raised minimum speeds every few years as an inexpensive way to keep customers happy with cable broadband.

The cable industry is in the process right now of increasing the speed of basic download speed to 200 Mbps – a number higher than predicted by the table above for 2022. There is a strong argument to be made that the cable companies have been resetting the definition of broadband while regulators were too timid to do so. I can remember when the cable companies collectively and unilaterally increased speeds to 6 Mbps. 12 Mbps, 30 Mbps, 60 Mbps, 100 Mbps, and now 200 Mbps.

This argument is further strengthened when considering that the big cable companies serve almost 70% of all broadband customers in the country today. When Congress gave the FCC responsibility for broadband in the 1996 Telecommunications Act, the requirement that the FCC has largely shoved under the rug was that rural broadband should be in parity with urban broadband. If 70% of new broadband subscribers in the U.S. are offered 200 Mbps broadband as the slowest basic product, it’s hard to argue that having a definition of anything under 200 Mbps today is not parity.

Congress wasn’t all that brave in setting the definition of grant-eligible at 100/20 Mbps. That is the lowest possible current definition of download speeds, and a number that is already starting to drift to be obsolete. Recall the gnashing of teeth in the industry last year while the legislation was being created – cable companies and WISPs both thought that 100/20 Mbps was too aggressive.

If we really wanted to future-proof the BEAD grants, then technology that won’t be built until 2028 should be required to deliver at least 300 Mbps download. Anything less than that means networks that the public will feel are inadequate as they are being deployed.

Another BEAD Grant Complication

I’ve been thinking more about the NTIA’s definition of Reliable Broadband Service that was part of the recently issued Notice of Funding Opportunity (NOFO) for the $42.5 billion BEAD grants. That definition says that any grant cannot be used to overbuild a reliable broadband technology that meets or exceeds the 100/20 Mbps speed threshold of the grants. The NOFO said that the grants can’t be used where speeds are adequate for the following technologies: (i) fiber-optic technology; (ii) Cable Modem/ Hybrid fiber-coaxial technology; (iii) digital subscriber line (DSL) technology; or (iv) terrestrial fixed wireless technology utilizing entirely licensed spectrum or using a hybrid of licensed and unlicensed spectrum.

The policy behind this makes sense – the NTIA doesn’t think that valuable federal grant dollars should be used where adequate broadband technology is already in use. That would make them a good shepherd of the federal dollars.

But this particular definition is going to cause some complications the NTIA might not have considered. I’ve been running into rural FWA cellular wireless broadband in rural markets. So far, I’ve only encountered the new technology from T-Mobile and Verizon. But this will also be introduced by Dish Network. AT&T says it also has plans to roll out the faster cellular home product.

The FWA technology is enabled when a cellular company beefs up cell sites to provide home broadband in addition to cell phone service. This is being enabled by the introduction of new spectrum bands. For marketing purposes, the carriers are labeling these new bands as 5G, although the technology is still 4G LTE.

The cell carriers have been offering a weak version of home broadband for years, marketed as a hotspot or jetpack. But that technology shared the same frequencies used for cell phone service, and the broadband has been slow, weak, erratic, and expensive. However, putting home broadband onto new cellular spectrum changes the product drastically.

Recently I heard from a farmer who is getting 200 Mbps download broadband from a rural T-Mobile FWA connection – this farmer sits right next to a large cell tower. According to the NTIA, this farm should not receive any grant subsidy to bring fiber broadband with a grant. But as is usual, real life is a lot more complicated than that. This same farmer says that his nearest neighbors, only a little over a mile away, are seeing speeds significantly below 50 Mbps.

This makes sense because that’s how cellular technology works. Most people don’t realize how quickly broadband signal strength weakens with distance from a cell site. In cities, practically everybody is within half a mile or a mile from a cell site, so we never notice. But in rural areas, most people live too far from a cell site to get decent bandwidth from this technology. Consider the following heatmap of a real cell site.

The fastest broadband speeds would be within a few thousand feet, like with the farmer. The area that might get 100 Mbps broadband is in the orange and yellow areas on the map. The speeds in the green areas are where speeds fall below 100 Mbps, and by the time the broadband signal reaches the light blue areas the speeds are almost non-existent. The purple areas show where a voice signal might carry, but only unreliably.

What does this mean for the BEAD grants? As T-Mobile and the other cell carriers start updating rural cell sites they are going to be putting heatmaps like the one above into the FCC mapping system. It’s worth noting that most cell sites don’t create a roughly symmetrical coverage pattern because the wireless signal gets disrupted by any obstacles in the environment, even small rolling hills. It’s also worth noting that cellular coverage is dynamic and changes with temperature, precipitation, and even wind.

Recognizing cellular broadband coverage (licensed) as reliable broadband will have several consequences. First, this disrupts grant coverage areas since there will be cellular areas in every county that won’t be eligible for grants. This will create a swiss cheese phenomenon where there are areas where grants are allowed next to rural areas that are not allowed. That will complicate the engineering of a broadband solution for the areas that are left. This is the same thing the FCC did with the RDOF awards – chopped up potential grant areas into incoherent, illogical, and costly swiss cheese.

This also might mean this farmer won’t get fiber. His neighbors who can’t get good speeds on T-Mobile might be covered by a BEAD grant, but an ISP might be unwilling to fund the cost to reach this farmer if the cost is not covered by a grant.

I doubt that the NTIA thought of the practical consequences of the new definition, just like I can’t imagine the FCC had the slightest idea of the absolute mess they made with RDOF coverage areas. The only way to justify building a new network in a rural area, even with grants, is to cover large areas with one coherent network – not by building a network that has to somehow avoid RDOF areas and cell towers.

ISPs interested in BEAD awards are now going to have to wait until the new broadband maps come out to know what this might do to their grant plans. I’m thinking that, at least in some cases, this will be the final straw that breaks the camel’s back and convinces an ISPs to walk away and not even try.

The BEAD NOFO – Financial Issues

The NTIA has established basic rules for the $42.5 billion BEAD grants in the recent Notice of Funding Opportunity (NOFO). One of most important aspects of the rules that potential applicants need to understand relates to funding and financing. Note that the NOFO instructs the States what it expects to be included in each state’s broadband grant program for the BEAD funding.

The first set of rules concerns the amount of grant funding. Since the IIJA passed Congress, the industry has been talking about BEAD grants offering 75% grant funding. It’s not that simple.

The NOFO says that states are required to incentivize matches of greater than 25 percent from subgrantees. That means states must make every effort to award less than a 75% grant. In fact, if two entities request building fiber to the same geographic area, the one asking for the smaller amount of money will automatically win, assuming they meet the basic grant requirement. This makes sense and will stretch the grant money further, but ISPs should be prepared for a sliding scale where the less the borrowing the greater the grant points.

The original Congressional language also held out a big promise for the layering of grants. The legislation specifically promised that an ISP could use ARPA or CARES funding from states and localities as matching for the BEAD grants. But the NTIA rules turn that promise on its head. States are encouraged to require a match from the subgrantee rather than utilizing other sources where it deems the subgrantee capable of providing matching funds. If a grant applicant has the ability to fund the grant matching, the NOFO rules suggest states should not allow the layering of local monies as grant matching. When that sinks in, it’s going to put a lot of public-private partnership discussions on hold.

The more disturbing requirement in the grant is that applicants must provide an irrevocable letter of credit along with a grant application. During the application process, prospective subgrantees shall be required to submit a letter from a bank . . . committing to issue an irrevocable standby letter of credit, in the required form, to the prospective subgrantee. The letter shall at a minimum provide the dollar amount of the letter of credit.

I have to wonder if the folks at NTIA understand what an irrevocable standby letter of credit (SLOC) means. Consider a grant application for $40 million, with a $10 million grant match. A bank must treat an SLOC as if were a bank loan. When the bank issues the SLOC, it ties up the $10 million on its balance sheet in the same way it would if it made a loan. The bank can’t loan that money to anybody else – it is frozen. While the bank is still holding the cash, it is not treated as a bank’s cash reserve since it is pledged. The bank will charge a minimal amount of interest on the letter of credit. In recent years that’s been something like 2% – hard to know what that might be with rising interest rates. If the interest rate is 2%, and the grant process takes a year to process, the ISP will have spent $200,000 in interest expense – even if it doesn’t win the BEAD grant.

It gets worse. When an ISP wins a grant it must then produce an irrevocable letter of credit for the life of the grant. This is even worse than the first letter of credit. Bank loans for fiber projects typically use construction financing – the same kind of financing used if you build a house. For a project built over four years, the ISP would take a draw each month as it needs funds and would only start paying interest on money that has been drawn. If a letter of credit must be created on the first day of a grant award, then using my example, interest rates for the full $10 million of matching would start when the letter of credit is issued. That completely negates the primary advantage of bank construction financing. My back-of-the-envelope math tells me that for a $10 million matching, the two layers of letters of credits could add $1 million to the cost of the project – all flowed to banks in the form of interest. None of this money is recoverable from the grant funding and comes out of the grant winner’s pocket.

To make matters even worse, a lot of smaller ISPs will not be able to obtain the letter of credit needed to apply for the grant. It’s a typical chicken and egg scenario. A bank won’t give an ISP a SLOC unless their existing balance sheet supports that much of a loan. But the ISP’s balance sheet won’t justify the SLOC until it wins the grant. This rule will definitely discriminate against smaller ISP – and by smaller, I’m including some fairly large companies like regional telephone companies and cooperatives.

The NOFO says there will be additional language coming to describe how municipalities will deal with the letter of credit issue. The NTIA is probably struggling with this because bond financing is more complex than a bank loan. A bond doesn’t exist until the day that bond buyers agree to buy the bond. It’s always possible that a bond issue won’t sell, so there can be no bank guarantees tied to future bond issues. I can’t wait to see this solution.

I don’t want to be dramatic, but this seems like massive overkill. It would appear that the NTIA is so fearful of having a few grant winners who will default on projects that they are imposing a billion-dollar industry cost to solve a million-dollar problem.

An Odd Appeal to Rural America

USTelecom recently sent a letter to practically every politician who might have a hand in deciding how broadband grants are awarded – the White House and key Cabinet officials, the NTIA, the FCC, members of Congress, Governors, Mayors, other local officials, tribal leaders, and state broadband offices. That’s some mailing list!

The main thrust of the letter is that communities should only rely on experienced broadband partners to build and operate networks – obviously meaning the big ISPs. The letter reminds officials that building a network is only a part of the solution and that communities need partners that know how to operate the business over the long run. The letter specifically calls out municipalities and non-profits as not being good partners because of their “propensity to fail at building and maintaining complex networks over time.”

The letter asks Congress to modify the current grant rules to remove any preferences for municipalities, non-profits, and electric cooperatives. USTelecom wants the grant rules to be changed to favor ISPs with experience and financial wherewithal. The big ISPs also think that communities should only be able to spend grant money by giving it to an ISP partner.

USTelecom also uses the letter to ask for changes that will make it easier to build broadband networks. They ask the various governments to:

  • Eliminate permitting delays and fees.
  • Streamline rights-of-way acquisition.
  • Streamline easements for railroad and other complex situations.
  • Eliminate Title II regulation (which, by the way, was eliminated by the last FCC – they actually fear it coming back).
  • Change the contributions to the Universal Service Fund so that all players pay a fair share.
  • Use only the FCC’s new maps to determine grant eligibility.

This letter is perhaps the most succinct statement of the broadband wish list of the big ISPs that I’ve seen in many years. They have been lobbying for everything on this list, but I can’t recall them asking for everything at the same time.

From a strategic position, this letter is mostly aimed at local officials. It’s unlikely that Congress or the White House is going to change the trajectory of the current grants at this late date. To do so would start the grant clock all over and push grant funding a few more years into the future.

It’s an interesting appeal to make to local governments since city and county officials will have a big hand in determining who gets grant funding when they choose a grant partner. This wish list basically tells local officials that they should have no option other than to fork grant money over to the biggest ISPs. And while asking local officials to change local rules to make it easier to build broadband, the big ISPs don’t want local governments to be able to challenge the FCC maps that the ISPs create. My guess is that most local officials are going to be offended by this document, so I don’t think this is going to get the reaction that USTelecom is hoping for.

The other odd aspect of this appeal is that most current grant money is going to rural America. The letter asks to keep electric cooperatives out of the broadband business – but many rural people still remember how the electric cooperatives bailed them out when nobody else would bring electricity. It’s interesting to stress experience when electric cooperatives have been around a lot longer than ISPs like the cable companies.

The big telephone companies have been around the longest – but they have a very poor name in rural America. A century ago, the large Bell companies refused to build in rural America, just like the big electric companies. Thousands of small local telcos were formed to fill the void but most eventually got gobbled up by companies that morphed into CenturyLink, Frontier, and Windstream. The big telcos have largely abandoned rural America over the last few decades – and it is that neglect that is the primary reason why rural broadband is in such bad shape. I’m sure there are some communities that will partner with the big ISPs – but a lot of communities that I work with would hope to partner with almost anybody else. This letter is not going to change many minds.